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IPO Subscription Scam

A few expensively priced IPOs and follow-on issues that opened recently failed to find retail subscribers. Financiers who help in closing the issue are extracting a hefty discount and also dumping the shares on listing.

While the government is drawing up major plans for follow-on issues of public sector undertakings (PSUs), the finance ministry would do well to take a real hard look at the IPO (initial public offering) market instead of being focused on the liquidity-driven boom in the secondary market. Industry sources tell us that a few expensively priced IPOs and follow-on issues that opened recently failed to find retail subscribers. They were only closed by pumping in subscriptions through financiers, who extract a discount of 30% to 50% for their funds. Most of them dump the shares on listing and this explains the mystery of the sharp discount at which many companies have listed.

Here is how it works. The problem is greedy promoters who shop for investment bankers promising the highest price for their shares. In the first couple of days after an IPO opens for subscription, panic sets in when the poor retail response becomes evident. The investment bankers bring in financiers who demand a 30% to 50% discount to put in applications. These financiers also have the capability of making 4,000 to 5,000 retail applications if required. Yes, the multiple applications scam is thriving, but has only got more sophisticated to evade detection. Our sources say that investment bankers are an integral part of this racket.

Another aspect of the scam is pure extortion. Here, some unscrupulous financiers prey on IPOs that get a poor response on opening. They then put in large applications to corner the retail quota. On issue-closing day, they call the company and its investment bankers and threaten to withdraw their application unless they are given a cash payoff. With little time to rustle up genuine applications, a couple of promoters have succumbed to the blackmail—but this trick cannot work over the long term. If the government is not aware of these dubious goings-on in the primary market and draws up disinvestments plans on the false belief that the IPO market is thriving, it may end up with serious embarrassment, rather than a solution for its yawning fiscal deficit.
— Sucheta Dalal
 

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COMMENTS

Dilip Davda

9 years ago

Sucheta, we have written about this in media, but it appears that all our efforts are meeting deaf and dump regulators. Vested interest game continues at the cost of retail investors. How long it will continue????

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